Student loan firm aims to save you some money
My Rich Uncle takes aim at traditional lenders, financial aid 'middlemen'
The high costs of higher education have many students and parents crying uncle or, at least, crying that they wished they had a rich one. As if on cue, enter My Rich Uncle, a company whose stated aim is to relieve some of the pain when arranging financing for college.
Haven’t heard of them yet? That’s sure to change, as My Rich Uncle recently began to ramp up its advertising campaign. And it’s what the ads say that causes financially strapped students to drop their calculators.
In a two-page ad that ran in the New York Times in July, My Rich Uncle didn’t mince words. In black and white, the company said it is the first student loan company to cut the federal loan rate by up to two percent at repayment. That means a potential 1.25 percent off the fixed rate for Stafford loans, which is now set 6.8 percent, and a potential two percent off the federal PLUS loan — which is made available to parents of undergraduate students, as well as to graduate and professional school students — where the fixed rate is now set at 8.5 percent.
People looking for student loans generally find their way to a certain lender based on a lender’s name on a resource list provided by the financial aid office of a college or university. Although banks do not have full autonomy in setting all the terms of the loan, they do have a certain amount of leeway about setting rates.“The law set by the federal government states that a lender is not prohibited from charging less than the federal rate of interest for the Stafford or PLUS loans,” says Raza Khan, My Rich Uncle’s president, noting there’s very little motivation for these lending institutions to lower rates and inject some healthy competition into the mix. The lender providing the loan, he explains, has a relationship with the guarantee agency, and the guarantee agency is further insured by the federal government. In other words, the lenders can’t lose. “The banks are making enormous profits from this without any risk whatsoever,” says Khan, who underscores that the lender’s name on the college or university’s resource list is enough to bring traffic to the lenders, without the lenders having to market themselves.
“What we realized was we could provide a federal loan and be profitable and not charge what the government has specified as the rate of interest,” says Khan. “If you want to compete, why not introduce a lower rate?”
Banking on students
My Rich Uncle’s owners — Khan created the company in 2000 with Vishal Garg, who’s the CFO — because, in Khan’s words, they “wanted to finance students in a variety of innovative ways.” Classmates in an elite New York City public high school, Khan and Garg had seen many of their fellow students without adequate credit histories give up spots at the country’s top universities for lack of adequate financial loans. The duo, now in their late twenties, wanted to improve the odds.
My Rich Uncle, which is not a bank, offers two types of products. One includes loans that are guaranteed by the federal government, which are the Stafford and the PLUS. On the Stafford, for example, a student would pay one percentage point lower at repayment. “The one-percent discount goes into effect immediately,” says Khan. Students can further lower their rates on a Stafford by an additional one-quarter percentage point for choosing the automatic debit option. There also is a two-percent principal balance reduction on the loan itself after the student makes 48 payments. On the PLUS loan, says Khan, a student can get a 1.75 cut immediately.
This past May, My Rich Uncle introduced two types of private loans, which are not federally guaranteed. The standard private loan is for students who have good credit histories and/or can provide a credit-worthy co-borrower. The second type is for students who lack or have a bad credit history, and who may qualify for an My Rich Uncle PrePrime loan. The company’s standard private loan has variable rates based on the three-month LIBOR index (based on a standard lending rate between banks) with a margin of about 1.8 percent, which could translate into a rate of about seven percent. The PrePrime loan is based on the prime rate.
Are Khan and Garg on a fast track towards losing their shirts, especially because their private loans aren’t guaranteed? Not according to Khan. “We spent a lot of time understanding credit risk, specifically with respect to students,” he says. But his big concern is more about the lack of understanding that students and their parents have about student loans in general.
Many people believe that, because a reputable institution of higher education recommends a lender, that the rate given by that lender is the best one out there, says Khan. That’s not the case, he says emphatically. “The New York Times ad let people know that, if colleges or universities are recommending a particular lender, that they’ve taken a fiduciary responsibility,” he says. “Unless they’re certain that the lender is providing a better deal, they should let their students know to shop around.”
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